[chrisk]

However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  

That is not my argument.  The Fed and the Treasury lied to the American people about inflation.  They told banks they would not raise interest rates because inflation was transitory and would disappear on its own.  They downplayed interest rate risk all the way through 2021 and into 2022.  Then when it became obvious that inflation wasn't going away, they began increasing interest rates at a historic pace.  They didn't make hoodwink Silicon Valley Bank into placing all their eggs in one basket.  But they aren't completely without blame, either, especially because they devalued the 10-year Treasuries very quickly despite their own forecasts that they told banks to rely on (see the links in my previous posts).

To blame a stress test rollback is wrong because the stress test as implemented in 2022 wouldn't have detected this particular issue of unrealized losses in the value of the 10-year Treasuries / the value dropping so much that there aren't buyers or counter-parties willing to take on the interest rate risk.  Between December 2021 and December 2022, unrealized losses ballooned from $8 billion to $620 billion.  Until the last few days, when bond prices began going back up, those losses probably approached $1T.

https://twitter.com/GRDecter/status/1634091448743219201

But in some respects, regulators do make banks hold some bonds.

https://twitter.com/GRDecter/status/1634193076221534208
https://www.reuters.com/business/finance...021-07-15/

Of course it was up to the banks to then hedge the interest rate risk, which most banks did to differing degrees.  In my earlier post, I noted that Bank of America didn't do as good a job at hedging compared to most other big banks, but Silicon Valley Bank's risk management was catastrophic.  Look at the date on the Reuters article.  You can see Chairman Powell's remarks as follows:

The central bank is staying the course, he said, with an inflation target of 2% and some time before it will be in a position to tighten monetary policy. Last month, Fed policy makers on balance projected inflation would climb to 3.4% this year and then fall back to 2.1% next year.

For individual investors or your investment club, laddering is a good way to get a consistent, dollar cost averaged yield.  I'm assuming your investment club isn't leveraged, and doesn't face liquidity crises or runs that require you to sell assets, though.  If the Fed chooses to allow more inflation, as it seems to be signaling, this will be the toughest investing environment in many years.  If the CPI numbers are >5%, as I expect them to be, the Fed's choices will be to allow contagion to spread in the financial sector or allow inflation to continue compounding and stressing individual consumers.  The Fed will choose the financial sector, and the less fortunate will fall further behind.  (But at these levels of inflation, everyone will suffer except the very rich).

After the Financial Crisis, the Fed suppressed interest rates because the inflation rate was running below 2% and growth was slow. When the Pandemic hit, they had to drop interest rates to 0. There was no expectation that these historically low interest rates from 2008-2021 were the long-run neutral rates. The board and management of the 16th largest bank knew or should have known that. Of course, SVB had been much smaller two years earlier.

This article alludes to the risk committee turmoil going on at SVB during 2022. They pushed aside the CRO in early 2022 and did not replace her until January 2023. Was the CRO pushed aside because she was incompetent or because she disagreed with management?

https://www.forbes.com/sites/noahbarsky/...d620301e7b

It will be informative to find out what the regulators were doing in 2022. What was the person at the Fed responsible for watching SVB doing?

[chrisk]

However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  

That is not my argument.  The Fed and the Treasury lied to the American people about inflation.  They told banks they would not raise interest rates because inflation was transitory and would disappear on its own.  They downplayed interest rate risk all the way through 2021 and into 2022.  Then when it became obvious that inflation wasn't going away, they began increasing interest rates at a historic pace.  They didn't make hoodwink Silicon Valley Bank into placing all their eggs in one basket.  But they aren't completely without blame, either, especially because they devalued the 10-year Treasuries very quickly despite their own forecasts that they told banks to rely on (see the links in my previous posts).

To blame a stress test rollback is wrong because the stress test as implemented in 2022 wouldn't have detected this particular issue of unrealized losses in the value of the 10-year Treasuries / the value dropping so much that there aren't buyers or counter-parties willing to take on the interest rate risk.  Between December 2021 and December 2022, unrealized losses ballooned from $8 billion to $620 billion.  Until the last few days, when bond prices began going back up, those losses probably approached $1T.

https://twitter.com/GRDecter/status/1634091448743219201

But in some respects, regulators do make banks hold some bonds.

https://twitter.com/GRDecter/status/1634193076221534208
https://www.reuters.com/business/finance...021-07-15/

Of course it was up to the banks to then hedge the interest rate risk, which most banks did to differing degrees.  In my earlier post, I noted that Bank of America didn't do as good a job at hedging compared to most other big banks, but Silicon Valley Bank's risk management was catastrophic.  Look at the date on the Reuters article.  You can see Chairman Powell's remarks as follows:

The central bank is staying the course, he said, with an inflation target of 2% and some time before it will be in a position to tighten monetary policy. Last month, Fed policy makers on balance projected inflation would climb to 3.4% this year and then fall back to 2.1% next year.

For individual investors or your investment club, laddering is a good way to get a consistent, dollar cost averaged yield.  I'm assuming your investment club isn't leveraged, and doesn't face liquidity crises or runs that require you to sell assets, though.  If the Fed chooses to allow more inflation, as it seems to be signaling, this will be the toughest investing environment in many years.  If the CPI numbers are >5%, as I expect them to be, the Fed's choices will be to allow contagion to spread in the financial sector or allow inflation to continue compounding and stressing individual consumers.  The Fed will choose the financial sector, and the less fortunate will fall further behind.  (But at these levels of inflation, everyone will suffer except the very rich).

After the Financial Crisis, the Fed suppressed interest rates because the inflation rate was running below 2% and growth was slow. When the Pandemic hit, they had to drop interest rates to 0. There was no expectation that these historically low interest rates from 2008-2021 were the long-run neutral rates. The board and management of the 16th largest bank knew or should have known that. Of course, SVB had been much smaller two years earlier.

This article alludes to the risk committee turmoil going on at SVB during 2022. They pushed aside the CRO in early 2022 and did not replace her until January 2023. Was the CRO pushed aside because she was incompetent or because she disagreed with management?

https://www.forbes.com/sites/noahbarsky/...d620301e7b

It will be informative to find out what the regulators were doing in 2022. What was the person at the Fed responsible for watching SVB doing?